Tony Brazier

www.braziers.co.nz

Tony Brazier

The Press - Wednesday 13 January 2010

How Far Do You Go?

How do you decide when and how much to spend on your investment properties? The answer to this is as varied as the personalities of the investors we deal with. Some spend nothing and pride themselves on how long a property can be owned without spending anything meaningful on it. Others spend way too much and have their tenants living in better conditions than their own families.

Most investors will play, “wait n’ see” where the decision to spend money becomes solely based on whether the next tenant is willing to take the property “as is, where is”. This mentality will only bare fruit for so long as the gradual diminishing of the calibre of tenant and the rental level will eventually hit the stark reality that, “I’m a slum landlord”.

When the property gets to this stage the investor often regrets not being a little more diligent with his/her maintenance programme because now having left it all to build up, it has become a much bigger job. Sometimes in markets like we are hopefully leaving behind the total refurbishment is required just to get the existing rent level. Now, that’s hard to swallow.

But how do we work out whether it is worth spending the money when our property manager is screaming at us to do the place up. Firstly ask what is missing that the existing tenants want or that prospective tenants have used as their reason for not taking the rental. E.g. insulation, heat pump, white-ware or just plain fresh paint. Ascertain what you can and can’t do something about. It may be that your own property’s internal configuration is no longer popular, or that the ideal tenants’ numbers have dwindled due to political decisions made offshore.

If so, sell it, or find an alternative use for the building. If not, list all of the things you can do something about and through consultation with painters, builders or alternatively your property manager, (who has probably done a thousand of them,) find out the cost of each item. For example; carpet ($3,000), painting ($2,500), drapes ($2,000) this equals $7,500 for a spruce up. Add a new galley kitchen ($7,000), new shower, toilet, hand basin ($6,000). Now, it’s looking sharp but do the light shades, switches, window frames and ceiling tiles let it down? Cost the renovation out in stages, 1) Quick flick, 2) The essentials, and 3) Totally new interior. End up with three end costs to consider.

Secondly, speak to rental agents, valuers and look up dbh.govt.nz to get the latest rentals in your area for the type of property that is represented by the three various stages you’ve costed out.

Thirdly, do the maths. Don’t forget to cost in the rent you lose whilst doing the refurbishment. Here’s an example.

Tom’s flat was getting $200 per week. He spend $10,000 on lost rent, new carpets, drapes and paint. He now gets $260 per week or $3,000 more per annum. Tom gets 30% return on his outlay of $10,000 which he borrowed at just 8%. The property would have sold on a 7% return prior (i.e. worth $143,000) but now would reach $190,000 on an improved 6.75% return. Is it worth it? Too right it is.

Tom has a far better asset giving a better return and probably feels much happier dealing with the tenant choice he has when owning a tidy property. (This example hasn’t mentioned the tax and depreciation advantages as they are in a state of flux presently. Take your own advice on these.)

The short answer to the question of whether it is worth spending money on your investment property is “Yes” but it is a matter of degrees as, unlike a house, you don’t get the secondary benefit of enjoying living there if you over capitalise. The decision should be made with the head and not the heart. It’s all on the numbers. By analysing varying degrees of expenditure you can then decide whether your particular property in your particular area is worth creating a whole new structure or simply just worth doing a quick flick through. Either way, anything is usually better than nothing.